For the first time since Brexit, the Court of Appeal has recently considered the interplay between the legal frameworks for consumer protection and for international arbitration in a dispute relating to the online auction of a non-fungible token (NFT).
This is the first case to explore the extent to which a party who wishes to exercise their consumer rights under domestic law to invalidate an arbitration agreement is able to have those rights determined by the English court. It is also the first English case to consider the hierarchy of the Brussels Recast Regulation in relation to arbitration and consumer rights and one of the first disputes that has arisen from an auction of an NFT.
Background to the dispute
The appellant Mr Soleymani took part in an auction that was held on the respondent Nifty Gateway’s online platform in 2021 and placed a successful bid of US$650,000 for a blockchain-based NFT associated with an artwork by the artist known as Beeple.
A dispute arose between Mr Soleymani and Nifty about Mr Soleymani’s non-payment of the US$650,000. Mr Soleymani contended that he had bid for the NFT in a conventional auction in which there was a single winning bid with the highest bid securing the NFT. However, the auction was in fact a ‘ranked’ auction, whereby the 100 highest bidders were successful and each received NFTs associated with the artwork in question.
The effect of this was that the successful bidders were awarded a numbered edition of the artwork corresponding to the position of their bids and Nifty Gateway and the artist were entitled to be paid the total sum of the 100 highest bids. Mr Soleymani’s bid was the third highest which meant that he received the third edition of the artwork by way of NFT. However, he stated that he would not have bid US$650,000 had he known this. On this basis, Mr Soleymani refused to pay for the NFT and, in response, Nifty Gateway commenced an arbitration in New York under the JAMS rules.
Mr Soleymani challenged the jurisdiction of the arbitrator and commenced a claim before the English court on 9 September 2021 seeking declaratory relief on three grounds:
- The arbitration agreement was unfair and not binding upon him because he is a UK ‘consumer’, being habitually resident in the UK and Nifty Gateway solicits business or otherwise directs its activities to the UK. As a result, he argued, the terms of the agreement are assessable for fairness and the arbitration clause was unfair and contrary to the requirement of good faith because it caused a significant imbalance in the parties’ rights and obligations to the detriment of Mr Soleymani.
- The governing law clause is unfair and not binding upon him (relying on the same statutory protection rights as for the arbitration claim above).
- The contract resulting from his bid, if it is a binding contract, is illegal ab initio because it is contrary to the Gambling Act 2005.
Nifty Gateway applied to strike out Mr Soleymani’s claim on the basis that the English court had no jurisdiction, arguing that the claim fell under the ‘arbitration exception’ of the Regulation (EU) No 1215/2021 (Brussels Recast Regulation), and also applied for an order to stay the proceedings in favour of being decided by the JAMS arbitrator in the New York arbitration.
The first instance decision
The High Court judgment that was delivered on 24 March 2022 held that the court had no jurisdiction to determine the arbitration agreement claim but did have jurisdiction to determine the governing law claim and the gambling act claim. The judge, however, granted a stay of these claims in favour of them being decided by the JAMS arbitrator. Mr Soleymani appealed against both aspects of the judgment.
Grounds of appeal
Mr Soleymani’s case on appeal was that the first instance judge fundamentally failed to take into account the nature of English consumer rights protection, inclusive of jurisdictional protection. He advanced three specific grounds of appeal:
- The court had jurisdiction under section 15B of the CJJA 1982 because the exception for arbitration under Article 1(2)(d) of the Brussels Recast Regulation did not apply to the arbitration claim.
- The first instance judge erred in concluding that section 15D of the CJJA 1982 did not apply to the governing law claim and the gambling act claim.
- The first instance judge erred in granting a stay of the proceedings under section 9 of the AA 1996 without determining the fairness question or directing a trial before the English court in relation to the issues raised by that objection.
Mr Soleymani argued that section 89 of the AA 1996 applies the unfairness provisions to terms which constitute arbitration agreements regardless of the applicable law of the arbitration agreement in question. The refusal of the stay meant that the consumer (in this case Mr Soleymani) had been forced to arbitrate in a jurisdiction which, while it may have its own consumer protections, would not automatically recognise UK consumer rights law. Mr Soleymani’s appeal also emphasised the fact that the domestic court is obliged to consider whether a contract term is fair even if fairness is not raised by either party.
Court of Appeal judgment
The Court of Appeal held that the appeal on the first two grounds should be dismissed but that the third ground – ie that the first instance judge erred in granting a stay of the proceedings without determining the fairness question or directing a trial before the English court in relation to the issues raised by that objection should be allowed.
The first instance judge’s finding that the arbitration agreement claim was outside the court’s jurisdiction was upheld. The court concluded that the existing hierarchy of the Brussels Recast Regulation was incorporated into the CJJA 1982 when the CJJA was amended to integrate into domestic law the parts of the Brussels Recast Regulation providing jurisdiction for consumer disputes.
Given that the correct interpretation of that hierarchy is that, where arbitration is the subject matter of the proceedings, they are excluded from the scope of the Brussels Recast Regulation, the court concluded that this interpretation should not be reversed in a consumer rights case. It was noted, however, that the amendments to the CPR from 1 October 2022 in respect of jurisdictional gateways would likely provide jurisdiction for such claims in the future.
In relation to the third ground of Mr Soleymani’s appeal, however, the court overturned the first instance judge’s direction that the claim be stayed under section 9 of the AA 1996, directing instead that there should be a trial to determine whether the arbitration agreement was “null and void, inoperative, or incapable of being performed” (pursuant to section 9(4) of AA 1996).
The court emphasised that the “public importance” of protecting Mr Soleymani’s fundamental consumer rights was a particularly powerful factor in relation to refusing a stay of the English proceedings. It stated that “provided it is properly arguable that there is a consumer contract with a close connection with the UK and a consumer seeking to rely on their rights under domestic law, then […] the vindication of those consumer’s rights in that context is best decided by a domestic court.”
In the context of a section 9(4) AA 1996 enquiry, therefore, the Court of Appeal clearly determined that “the domestic court is better placed to undertake the fairness assessment under domestic law than a foreign arbitrator would be applying that law.”
As referenced above, this case is notable as a result of involving a number of legal firsts. It is the first case to consider whether an English consumer invoking their consumer rights to invalidate an arbitration agreement can have those rights determined by the English courts, as opposed to the arbitral tribunal. It is also the first case to consider the implications of the incorporation of the Brussels Recast Regulation into domestic law following Brexit, in addition to confirming the hierarchy between arbitration and consumer rights in the Regulation. And, finally, it is the first case involving NFTs (or indeed any digital assets) to be considered by the Court of Appeal.
The court made an interesting statement in relation to arbitration, noting that its private nature – “which often has important value in a commercial context” – is disadvantageous in relation to consumer rights issues. It was stated that part of the purpose of section 71 CRA 2015 is to allow decisions on consumer rights to be made in a public forum, as they may have precedential value and benefit not only to individual consumers but also to consumers as a class.
Given the court’s emphasis on the public importance of decisions vindicating (or not) consumers’ rights and its statement that “the case Mr Soleymani is seeking to make has implications for consumers in general in this jurisdiction”, it is interesting to speculate on the broader impact of this case on arbitrations in consumer dispute resolution.
The court noted that consumers may apply to the court for declaratory relief that an arbitration clause is unfair under the new jurisdictional gateways under the CPR which took effect from 1 October 2022. As a result of these new gateways, it may well be that the Court of Appeal’s interpretation of the existing hierarchy of the Brussels Recast Regulation may no longer be applicable in future cases, meaning that arbitration agreement claims such as this one may be determined to be within the English court’s jurisdiction under the CJJA 1982 and thus more likely to be successful.
As it is understood that the JAMS arbitration continued despite the appeal, it will be interesting to learn whether the arbitrator placed the arbitration proceedings on hold following the Court of Appeal’s judgment (which is thought to be unlikely in the circumstances) or whether she will make an arbitration ruling which could then be appealed in light of the court’s decision.
The JAMS arbitration clause, which is used by many online platforms, marketplaces and crypto exchanges, includes the requirement to travel to the tribunal in the USA. Mr Soleymani argued that the clause is unfair because it causes a significant imbalance in the parties’ rights and obligations and that the inherent obligation to base arbitral proceedings in the USA is detrimental to a UK consumer.
In the context of the ‘average consumer’ this appears likely, given the financial burden of travelling to the USA from the UK. However, it was queried in the Court of Appeal judgment whether Mr Soleymani should be categorised as a ‘consumer’ given his substantial resources and the sum spent on the digital asset at the heart of the dispute with Nifty Gateway (the NFT). It was said that Mr Soleymani is a very wealthy individual with significant NFT holdings and a large family inheritance invested in real estate in the UK, the UAE and Turkey. He is said to collect fine art, with a private gallery to display his art collection and has been amassing art-related NFTs for some time.
Although Nifty Gateway accepted that Mr Soleymani had the better of the argument that he is a consumer under the CPR Part 11 application and should accordingly be treated as a consumer for the purposes of that application, it did not accept that he was a consumer for the purposes of the CRA 2015 and CJJA 1982. The court, indeed, stated that “[Mr Soleymani] is not a typical consumer, if he be a consumer at all, and the transaction involving the purchase of an NFT for US$650,000 is not a typical consumer transaction” and “he clearly has the resources to defend himself in the New York arbitration…Overall, at a practical level, there is no obvious imbalance in an ability to litigate between Nifty and Mr Soleymani…so why does he need the court’s help?”.
Despite these statements, the court did conclude that “the arguments with which we are concerned must be tested by reference to the rights and protections afforded to consumers generally”, but the writers query whether, in future, marketplaces and exchanges might seek to challenge similar claims on the basis of claimants not falling within the “consumer” category.
This article was co-authored by Sophie Newman.